Arcos Dorados Holdings Inc. — 2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015; filed April 29, 2016. This is an annual report, not a standalone fourth-quarter filing. Arcos Dorados operates and franchises McDonald’s restaurants in 20 Latin American and Caribbean territories. Financial statements are audited and prepared under U.S. GAAP.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $3.053 billion | $3.651 billion |
| Operating income | $93.4 million | $70.9 million |
| Operating margin | 3.1% | 1.9% |
| Adjusted EBITDA | $230.2 million | $251.7 million |
| Adjusted EBITDA margin | 7.5% | 6.9% |
| Net loss attributable to Arcos Dorados | $(51.6) million | $(109.3) million |
| Net cash from operating activities | $112.7 million | $193.1 million |
| Capital expenditures | $92.1 million | $170.6 million |
| Cash and cash equivalents at year-end | $112.5 million | $139.0 million |
| Working capital | $(198.7) million | $(94.9) million |
- Revenue fell 16.4% in U.S. dollar terms, principally because of local-currency depreciation, including the sharply weaker Brazilian real and Venezuela’s move to the SIMADI reporting rate. Systemwide sales grew 12.5% on a constant-currency basis but declined 17.7% nominally.
- Systemwide comparable sales increased 9.9% on a constant-currency basis, driven mainly by higher average checks and price increases. Systemwide restaurants totaled 2,141 at year-end, up from 2,121; 36 opened and 16 closed during 2015.
- Operating income improved despite lower reported revenue. The filing attributes the improvement in other operating income partly to lower Venezuelan impairment and inventory write-down charges, a Brazilian tax recovery, and gains on property sales and insurance recoveries. Adjusted EBITDA, however, decreased 8.5%.
- Net interest expense was $64.4 million; foreign-exchange losses were $54.0 million. The net loss narrowed year over year but the company remained loss-making. The 2015 effective tax rate was reported as negative 79.9%, reflecting the relationship between tax expense and pretax loss.
- Operating cash flow decreased by $80.4 million, mainly due to lower earnings adjusted for noncash items and adverse working-capital movements. Investing cash outflow was $60.1 million, down from $169.0 million, chiefly because of reduced restaurant and other property investment. Financing cash outflow was $42.3 million; cash decreased by $26.5 million after exchange-rate effects.
- At December 31, 2015, reported total financial debt was $654.2 million, net of derivative fair value, and cash was $112.5 million. The 2023 notes had $469.5 million carrying value; the 2016 notes had $158.8 million carrying value and matured July 13, 2016. Most long-term debt was U.S.-dollar-denominated, leaving the company exposed to currency movements.
Material changes versus the prior year
- Revenue declined $598.3 million (16.4%), while operating income increased $22.6 million (31.8%) and the attributable net loss narrowed by $57.7 million.
- Adjusted EBITDA fell $21.5 million, although its margin rose from 6.9% to 7.5%. The filing’s non-GAAP measure excludes specified items, including impairment, reorganization costs and depreciation; it may not be comparable with similarly named measures at other companies.
- Capital spending fell by $78.8 million, and openings slowed from 82 in 2014 to 36 in 2015. The company opened 53 reimaged restaurants in 2015.
- Year-end current debt rose materially as the 2016 notes approached maturity, while cash, current assets and equity declined. Total assets fell from $1.795 billion to $1.407 billion, and total equity from $457.6 million to $286.9 million.
- Comparable sales growth was broadly stable at 9.9% versus 10.0%, but performance varied sharply by division: 1.9% in Brazil, 25.0% in the Caribbean, 1.2% in NOLAD and 23.2% in SLAD. Venezuelan currency translation makes regional comparisons particularly difficult.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures of $90 million to $120 million, including at least 32 gross restaurant openings. The amended 2014–2016 McDonald’s plan requires at least 150 openings and 140 reimages, with a stated reinvestment commitment of at least $180 million. Management expected to fund these commitments from operating cash flow and stated liquidity was adequate for anticipated needs over the next 12 months.
- The company planned to monetize selected real estate assets and said it saw potential to alter the mix of company-operated and franchised restaurants to support liquidity and margins. No specific financial forecast or earnings guidance was provided.
- McDonald’s granted limited waivers of certain MFA financial-ratio requirements through March 31, 2016. At year-end, the disclosed MFA leverage ratio was 4.40 against a stated maximum of 4.25; fixed-charge coverage was 1.56 against a minimum of 1.50. Failure to extend waivers or meet requirements could constitute a material breach and give McDonald’s significant acquisition or termination rights.
- Subsequent to year-end, the Brazilian subsidiary entered into a $167.3 million secured loan on March 29, 2016, converted through swaps into reais at an effective CDI-plus-4.50% rate, to help refinance the 2016 notes. The company reported an April 26, 2016 tender settlement for R$421.8 million of those notes. These post-year-end transactions do not change the December 31, 2015 balance sheet.
- Foreign-exchange volatility, inflation, price controls, import restrictions and currency-transfer controls are significant risks, particularly in Venezuela, Argentina and Brazil. Venezuelan operations generated $40.9 million of 2015 revenue and an operating loss of $28.3 million; the country was treated as highly inflationary under U.S. GAAP. Argentina’s new administration eased some exchange controls after December 2015, but future restrictions remain possible.
- Other material risks include reliance on McDonald’s franchise agreements and brand, commodity and labor cost pressures, franchisee financial health, supplier concentration and mostly oral supplier arrangements, and regulatory limits on advertising, children’s promotions and food pricing.
- Contingencies include Puerto Rican franchisee claims seeking $66.7 million plus fees, a related $30 million claim, and a $31 million franchisee-association claim. The company reported a $20.6 million net contingency provision and separately disclosed possible losses of $49 million to $69 million on certain tax and labor matters. Management considered adverse outcomes in the Puerto Rican matters unlikely; ultimate outcomes remain uncertain.
- The filing reported no dividend declared for fiscal 2015. It also reported no off-balance-sheet arrangements and stated that disclosure controls and internal control over financial reporting were effective; the auditor gave unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile the filing’s debt, current-maturity and contractual-obligation disclosures, and confirm the subsequent 2016 notes tender and refinancing amounts and terms.
- Confirm the status of MFA covenant waivers, compliance after March 31, 2016, and progress against opening, reimaging and reinvestment commitments.
- Assess cash generation and working-capital needs against the stated capital-spending plan, lease obligations and debt service.
- Review the effect of currency translation and controls—especially Venezuela’s exchange-rate assumptions—on reported revenue, assets, margins and cash repatriation.
- Track the resolution and potential exposure of labor, tax and franchisee litigation, including whether reserves or indemnification recoveries change.